European Union VAT: ECJ rules VAT may be recovered on sale of shares of subsidiary

The European Court of Justice (ECJ) ruled on 29 October 2009 that input VAT incurred on the sale of shares in a subsidiary may be recovered in certain instances (Skatteverket v. AB SKF (Case C-29/08)). The decision may have implications for some businesses that have incurred costs in relation to share sales, which may now be able to recover significant amounts of the VAT incurred (subject to limitation periods). Notably, the ECJ did not follow Advocate General Mengozzi's recommendations in the case.

The case involved SKF, the Swedish parent company of an industrial group that carried on activities in several countries. SKF actively participated in the management of its subsidiaries and supplied (for consideration) certain services, including management, administration and marketing policy. The services were invoiced to the subsidiaries and SKF was liable for VAT on the services. With a view to obtaining funds to finance other activities of the group, SKF decided to restructure the group and dispose of the subsidiary's business by transferring all of the shares in the subsidiary. SKF also disposed of its 26.5% shareholding in another company, which had been wholly owned and to which SKF also supplied services subject to VAT. To effect the disposals, SKF envisaged requiring supplies of services in the area of valuation of shares, assistance with negotiations and specialized legal advice in drafting the contracts, all of which were subject to VAT. In 2008, the Supreme Administrative Court of Sweden requested a preliminary ruling from the ECJ on the VAT treatment of the sale of shares in a subsidiary and whether VAT incurred on legal and other professional fees with respect to the sale is deductible.


ECJ decision

In ruling in favor of the taxpayer, the ECJ concluded that the sale of shares by SKF was more than a passive disposal of securities, due to its active involvement in the management of the subsidiary and the controlled company. The ECJ also considered that it was apparent that the sale of shares was directly linked to and necessary for SKF's economic activities.

Accordingly, the ECJ held that the sale of shares was within the scope of VAT, but that it was an exempt supply for VAT purposes.

The key issue was whether the VAT incurred in relation to the sale is deductible. On this point, the ECJ contemplated two situations:
- There is a right to deduct VAT paid on services supplied for the disposal of shares, provided there is a direct and immediate link between the costs associated with the services and the overall economic activity of the taxable person (following the ECJ's analysis in cases such as Kretztechnik); and
- In some circumstances, the sale of shares (where it effectively transfers all of a business's operations) is analogous to a transfer of a business as a going concern. According to the ECJ, simply because a sale is effected by the sale of shares rather than assets should not produce a different result in terms of the VAT recovery treatment of associated costs.

It is up to the national courts of the Member States to determine whether the requisite link between the costs and the economic activities exists.


Implications

Under current practice in several countries, share sales are treated as exempt from VAT and any VAT incurred on costs associated with a share sale is not deductible. The ECJ decision in AB SKF suggests that these practices may be incorrect and that there could be more scope for businesses to reclaim VAT than previously had been thought. These businesses may now be able to recover significant amounts of the VAT incurred, subject to limitation periods.